Light on the wallet: Thinking on lower direct tax rates timely

TNN|

Nov 09, 2006, 12.00 AM IST

0Comments

The finance minister’s comment that further moderation in tax rates was possible if compliance increased is a welcome surprise. To the extent that more and more income and value addition has become transparent and taxable over the past few years, there is a case for a lighter touch.

Although corporate income is taxed at a nominal 30% rate, because of exemptions the effective tax rate is much lower, less than 20%, and could fall further when SEZ incentives kick in. So it makes sense to reduce the nominal tax rate on corporate income and simultaneously remove exemptions.

As a result, while the effective tax rate may well remain the same, tax administration and compliance could become lot easier, which should in turn help widen the tax base further.

The nominal rates on individual income are reasonable too, except that the peak 30% rate kicks in at fairly low-income levels and there is certainly a case for reworking the slabs. Besides, with more services becoming taxable and VAT regime beginning to take root, a greater percentage of individual income now accrues to the government.

The imminent goods and services tax (GST) regime could increase the burden of indirect taxes further. The case for moderation, however, ought to be tempered with the need to augment tax revenue, more so as the government has reiterated its commitment to fiscal consolidation, which limits fiscal deficit to 3% of GDP.

To function effectively, the government’s tax revenue needs to go up to at least 25% of GDP. A review of exemptions and caution on further tax concessions is in order, if direct tax rates are to be lowered further.